Zbigniew Piekarski looks at where the money is coming from
"Maybe I don't understand the market, but I prefer not to have the same kind of continued exposure I've had up until now. In some ways I think the music has stopped only most people are still dancing."
- George Soros, May 2000
The Business Cycle Dating Committee of the National Bureau of Economic Research (www.nber.org) has concluded that the recession in the U.S. began in March 2001 and ended in November 2001. It lasted only eight months, which was slightly less than the average 11 months for recessions since World War II.
The NBER is the U.S.'s leading non-profit economic organization, with more than 600 professors of economics and business as researchers. These are the same heavyweights who have moved the odds of deflation occurring from 10,000-1 to the most recently quoted 4-1.
Rest assured that all is well and recovery is on its way. But have you noticed it's very warm? Record temperatures again. The whole of Europe is sweltering. Italy had some problems with a lack of electricity and water. Then there is the little problem in Japan. Tokyo Electric Power, the world's largest private electricity company, had to close its 17 nuclear reactors after it was caught last September falsifying safety records to hide cracks at some of its power plants. Japan may have to increase its imports of oil, coal and liquified natural gas, causing a surge in demand in world energy markets.
Still, all is well as the bourses of the world have resumed their "natural" path, and the "bumblebee rally" (a term applied by Art Cashin of UBS Financial in honor of the laws of aerodynamics which state that bumblebees should not be able to fly) has turned into a "religious rally" based on faith and hope.
When markets decide to rise, they ignore all bad news. Job losses, increasing debt, the property bubble, chronically high energy prices, little pricing power for companies, a big mess in Afghanistan, a bigger one Iraq and now North Korea and Iran - none can interfere when the herd starts on its migrations. Corporate governance issues have been resolved, and "geo-political certainty" re-established. The consumer is alive and well, and one million TV sets were bought from Wal-Mart in one day. They were all made in China, who alone could supply the whole world with merchandise at cut-rate prices.
According to the Cato Institute's Veronique de Rugy, U.S. President George W. Bush is "governing like a Frenchman," seeking to curry favor with voters, "stimulate" a shaky economy and overcome both political and financial dangers by throwing money everywhere. Unfortunately, recent sales of government debt have received a lukewarm response, and after Greenspan promised to take any "pernicious downward spiral in consumer prices" off the table, the U.S. had the largest daily capital loss on bonds since 1998. On any given day, 99 percent of investors do nothing. They neither buy nor sell. It is the one percent "on the margin" that control the movement of the price. That day, the one percent who had made a profit in the "carry trade" by borrowing short-term money and investing long decided to throw in the towel, and capital values plummeted. All government bonds plummeted. I wonder what will happen when Poland defaults.
New Economy companies are seeing little sign of economic growth and the Old Economy companies are changing themselves into banks-in-disguise in order to make money, so what hope is there for a stock market that is selling for more than 30 times earnings?
Let us take the example of General Motors (many companies including General Electric fall under this category). General Motors produces cars. But that is not where it earns its money.
For the last quarter, GM reported overall earnings of $901 million. Profits from its worldwide automotive operations collapsed by nearly $1 billion to a mere $140 million. Profit from the finance division almost doubled to $834 million. GM's mortgage operations produced $415 million in net profits, or about three times more than the profit from the company's vast, worldwide auto operations. A few weeks ago, GM successfully placed $17.6 billion in bonds - the largest fund raising ever - to prop up their underfunded pension liabilities, which stand at about $75 billion.
You may believe that GM is safe as it is "too large" to go under. Enron and WorldCom were also considered as "too large to go under." You may think that GM has fixed assets that it can dispose of if it gets into trouble. The question is, who will buy and at what price?
What new financial phenomenon will emerge to carry share prices to the next new plateau of ever-more-ridiculous valuations? The music has stopped but the boys and girls are determined to carry on dancing - tap dancing in bare feet on hot coals.
On the WSE: Let me end on an upbeat note. After extensive consultation with countless academics and a state-sponsored research trip to India, I have come to the conclusion that the outsourcing of jobs for the various support services in the telephone, banking and insurance services to that continent has a very low probability of occurring. No one over there wants to learn the Polish language. Thus the over-valuation of stocks will continue. Mind you, there is always Ukraine.
